ISSUE 6 I MAY 2009
HORIZON THE
Budget spotlights huge retirement challenges and the need to DIY
Facing your PROPERTY INVESTMENT FEARS ECONOMIC RECOVERY BY YEAR END?
NEWSLETTER
Super tax changes likely to increase demand for investment property
New home affordability AT A 7-YEAR HIGH HOUSING DATA POINTS TOWARDS RECOVERY!
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Budget spotlights huge retirement challenges and the need to DIY The $14 billion cost to increase pensions by $32pw for singles and $10 for couples is small change compared to the challenges that lie ahead. It’s time to look out for yourself. The facts are that 1 million people will retire in the next 10 years, and a further 3 million in the 10 years after that. By 2047, 7.2 million people - or a quarter of the population - will be over 65. This is double the current level of 13%. And these 7 million retirees will be living much longer than ever before (thankfully, as most of us will be amongst them!!). With the increase in the retirement age moving out to 67, this is an effective 5% increase in the number of years you have to keep working (assuming a working life of 40 years). While McCarthy Group is not focused solely on investments that lead to retirement, the huge budget costs in providing even minimal increases for the current amount of pensioners highlights the demographic challenge that lies ahead and the need to have a strategy to provide income in your golden years. The same applies to super. In the wake of the global financial crisis, people are waking up to the fact that there is nobody better suited to looking after your money than.....you! After all, you earned it. And handing it over to a fund run by managers more interested in their own outcomes than yours, and earning hefty fees for their efforts, makes little sense.
McCarthy Group and its clients are well placed at the dawning of this ‘Hands on’ DIY investment era. Property investments have stood the test of time, and more and more of our clients are seeing that the proven principles of property investment can be applied to super planning. As a result we are expanding the breadth of services offered by McCarthy Group Financial, and we are well placed to support you - with specialist and professional guidance every step of the way - into finance for DIY super funds, where you can borrow to invest in property assets in your super scheme. As the challenges to future financial independence increase, so too must be the measures that you take to ensure that you do achieve this goal. This means doing it yourself, as so many have done so successfully with private property investments. The warning call of this budget is that it’s time to make a move. And there’s no time to waste. Call our specialists on (02) 9687 3601 or email us at info@mccarthygroup.com.au for further information or for an appointment to review your position.
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Are we there yet? There are increasing signs that the worst of the financial and economic slowdown are behind us, and that we are heading towards better times. The economic growth cycle we enjoyed went on for 17 years. This was a long, sustained upswing, and we all benefited from it. The current slowdown will be much shorter-lived. Thank goodness! And there are signs that we are through the worst, despite that unemployment is forecast to grow further. The Chairman of the RBA, Glenn Stevens, predicts that the Australian economy will start getting better by Christmas, but that the recovery from recession will be slow. That’s just over 200 sleeps, and sounds just fine in our book. There are already signs that things are moving. The share market growth we have seen is a strong signal, and often precedes economic recovery by 6 months. The news for recovery in China is also good, which means solid support for exports. Interest rates being kept on hold is also a positive signal. Yes, we would all like lower rates. But not lowering them is a good sign that we are near or at the bottom of the cycle. In any event, a fair question would be how much of any interest rate cut would be passed onto consumers. It will take some time for confidence and optimism to return, but the good news is that we seem to have reached the turning point, and that is reassuring in itself.
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Facing your fears There are few (if any) McCarthy Group clients who didn’t have to overcome fear as the biggest obstacle in their investment decision. When first confronted by the extent of a future funding shortfall, some of our clients burst into tears. “How did we allow this situation to creep up on us?” they ask, as they are faced with the harsh facts of what life after work stops will look like. However, when faced with a positive investment solution that can solve the problem, a whole new set of fears emerges. Fear of debt. Fear of a major commitment. Fear of being ripped off. Fear of investing in the wrong area. Fear of the unknown. Fear of future work prospects. Fear of simply making a mistake. Fear of losing face. Fear of losing money. Fear of bad tenants, or even no tenants. Fear of everything that could go wrong. We have all gone through similar fears, and in my view, the ability to face these fears and overcome them with positive decisions is why you are sitting in a strong position right now compared to people in similar circumstances who simply couldn’t summon the courage to do the same. When faced with real fear, our inner mind starts talking to us. “Debt is a bad thing. Don’t do it. You don’t understand any of this stuff. You’ll make a mistake. There are so many stories of companies going bust.” It is in this spirit that we salute you and say “Well done” on facing up to what we all have had to, and for making big decisions that will shape your future. Facing your fears is the first step to becoming financially independent. It’s certainly not easy. Which is why so few people succeed in doing it.
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Sydney looms as a future hotspot - not enough construction! No-one has told the people who pick Sydney as the major immigration arrival point that the construction of new homes is going steadily down even as demand increases. Landlords are set to benefit. Aside from the new arrivals, first-home buyers have been buying up stock for themselves, but this has done little to free up demand for rental homes. Based on a study of ABS data by Colliers International, Sydney’s total residential building approvals were down by 18 percent for the year to March 2009, compared to the 12 months prior. This was in contrast to Melbourne, where approvals dropped by only 1.5 per cent. “These figures show a dramatic difference between Sydney and Melbourne’s new housing markets and Sydney’s developers will need more incentives to increase development activity,” said Colliers NSW research analyst Matthew Tiller. “Strong population growth and declining building approval numbers can only mean that Sydney will continue to experience strong rental growth and low levels of affordability, as the number of new residents entering the property market outstrips the number of dwellings needed to accommodate them,” said Mr Tiller. Source: Lending Central, 20 May 2009
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
House prices are a) Rising b) Falling c) Going sideways d) All of the above If you are confused about house price movements, you are not alone. The market is moving in many different ways, all at the same time. On a daily basis, we read reports on housing data that either reassure us or makes us feel anxious about what’s going on. We read of a mini-boom in the sub-$500,000 market, where the FHOG has driven prices up in the face of strong demand. From there to $900,000, prices are softer, and at the top end, prices have tanked as the investment bankers and others have had to sell trophy properties to fund their lifestyles or to top up other investments. What is clear is that there is no single answer. The high percentage of properties being sold below $500,000 is also serving to pull median prices down. At McCarthy Group we remain convinced that investing in the right price segment in the right areas will bring solid returns in the years ahead. By this we mean structured developments that haven’t been ‘overheated’ by the FHOG, built at $350,000 to $450,000, in areas like Melbourne, Sydney and North Queensland, areas where the increase in population has long exceeded the rate of new home construction. It is also our view that this is a time to hold onto and preserve existing properties for which finance has already been granted, and where future gains will return. It is a good time to remember that while the long-term property growth trends are absolutely proven, there are dips and valleys along the way. So don’t be anxious in the face of a report that says that house prices gave fallen. Because the next day a fresh report will say the opposite.
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Interest rates an issue you need to consider There are confusing signals in the market, but you need to face up to what to do about interest rates. The options need to be carefully considered. While some banks have started to increase their fixed interest rates, there is talk that the RBA will bring interest rates down further. This is because the government is at full stretch already, and further economic stimulus will need to come from interest rate reductions. These are confusing signals, but as a general principle, banks start to move their fixed rates upwards when the bottom of the cycle is nearing. Only a very small percentage of new loans currently being granted are being fixed. This is in contrast to when interest rates were nearing their peak, when people (mistakenly) fixed their rates at the TOP of the cycle and so shut themselves off from the benefit of falling rates. The banks’ moves show how they are preparing their books for 2 or 3 years from now. Interest rates will move up, and the fixed rates are the first to do so. Should you choose to refinance some or all of your loans, the options are to, * Fix the loans * Have variable loans * Have a bet each way, and split the loan amount between fixed and variable There are typically costs or exit fees involved if you refinance ahead of the expiry of your
current loan period. These fees need to be worked out carefully to show what the overall benefit will be if you change your strategy. Fixed loans will enable you to ‘lock in’ the current low interest rates on offer, and give you a ‘fixed cost’ that will be unchanged when variable rates go down, and then back up again. Variable rates will let you benefit from any further reductions, and they also give you greater flexibility through features such as an offset account. There is no right or wrong answer. At the end of the day it’s what suits you, your risk profile and your budget the best. Our advice, however, is to suggest that you do review your strategy as we get near the bottom of the cycle. This is the time to do it, and is a step not to be overlooked, as once the trend turns, the advantages and benefits of acting early start to reduce. McCarthy Group Financial can assist you with professional advice before you make any change, and help you to obtain the best rates. We are happy to assist you in any of your re-financing needs at no additional cost to you, which is all part of the ongoing service we provide to our clients.
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
It’s tax time - make sure you claim everything that’s due To optimize your investment property returns, make sure your paperwork is organized and that your accountant claims every legitimate cost and service. Now is the time to do it. Owning an investment property is like running a business. You invest in a project, receive income for the value it provides, and face expenses for the costs associated with the project, such as interest on the mortgage, council rates, property management, maintenance etc. Just as it is vital to optimize the inflows, so is it essential that you are well organized and have the records to enable your accountant to calculate all your allowable expenses and allowances, such as depreciation. Aside from maximizing your returns, it gives rise to a great sense of achievement when you are able to account for your investment business in a highly professional way. For your reference we have attached a list of the items you need to be looking at in terms of allowable expenses.* * advertising for tenants * bank charges * body corporate fees * borrowing expenses * council rates * decline in value of depreciating assets * gardening and lawn mowing * insurance * land tax * pest control * property agent fees or commissions * repairs and maintenance * stationery * telephone * water charges, and * travel undertaken to inspect the property or to collect the rent. A handy online reference is provided by the ATO at Rental Properties 2007-2008. The McCarthy Group filing system has been specially developed to help you keep track of everything and be super-organized at tax time. Please give us a call if you need any help as the end of the financial year approaches. *List source: La Trobe Financial, Lending News, 21 May 2009
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Economic recovery by year-end? “The improvement in economic indicators is consistent with an economic recovery by year end,” says AMP Capital Investors’ chief economist, Shane Oliver. This is the kind of forecast that we like at McCarthy Group. The fears of the end of the financial system as we know it, and a second Great Depression, have receded into the past, and positive signs have emerged in many countries, including Australia. What we like in particular is the potential for a very strong rebound given the speed of the decline that we went through. Oliver says while there is increasing evidence that the recession is abating and there is reason for confidence in a recovery from later this year, there is much uncertainty regarding the strength of any recovery. “The historical record tends to indicate that the deeper the recession the stronger the recovery,” he says. “US recessions with a 3% or greater fall in GDP have seen 5% plus rates of growth in the first year of recovery. In Australia, recessions deeper than a 2% slump have been followed by a 6% plus rebound. “Since this recession will be pretty deep in many countries including the US, if not Australia, history would suggest the possibility of a ‘Deep V’ style recovery.” (A deep but short recession followed by a quick turn around and a steep recovery.) On balance, says Oliver, a constrained recovery seems most likely, at least for the first year of recovery (i.e., next year). However a V-shaped rebound should not be ruled out. Source: Jill Fraser, Lending Central, Friday 22 May 2009
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
New home affordability at a 7-year high* A softer property market and record low interest rates continue to make buying a first home the most affordable in years. The Housing Industry Association (HIA) and Commonwealth Bank First Home Buyer Affordability Index yesterday revealed a 14.6 per cent improvement in housing affordability in the March quarter. This improvement was on top of a 40 per cent increase in the December 2008 quarter, bringing first home buyer affordability to its highest level in seven years. Average monthly loan repayments fell to $1,831, the report showed, with a further reduction in repayments expected in the June quarter. Notwithstanding current economic conditions HIA chief executive Chris Lamont said for many aspiring first home buyers there has never been a better time to buy. *Source: Mortgage Business, Tuesday 19 May 2009
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Housing data points towards recovery* The Eurekareport shows that the combined number of loans to build new homes is growing steadily, and not all is due to the FHOG. Good news indeed. Recent housing data shows that total loans in March (excluding refinancing) were 30.5% higher than the bottom of the market, which was reached in August 2008. It also shows that recovery started in September 2008, which was when the first rate cuts were introduced. The number of loans to buy new homes has risen by 45% since the August low point and has risen to levels similar to before the onset of the GFC. The report states that the combined number of loans to build new or buy newly-built dwellings is the highest since October 1999, which is the year that the last Australian housing boom began. So while not predicting another boom just yet, the report shows the probability that economic recovery is underway. Very good news indeed. The recovery in housing began with the first rate cut
47500
44500
7500
41500
39500
6500
35500
5500 Mar 03
Loans for Newly built or Construction, left axis Total excl refin, right axis Mar 04
Mar 05
Mar 06
47500
Mar 07
Aug 08
Mar 08
32500 Mar 09
Recovery not only “first buyers� 34
44500
41500
30 First month after FHB Boost effective
39500
26 35500
*Source: Eurekareport, by Ron Woods, 15 May 2009. Charts obtained from the same source.
32500 Mar 03
Total excel refin seas adj, left axis Non first home buyers also up, right axis Mar 04
Mar 05
Mar 06
Mar 07
22 Mar 08
Mar 09
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Tall timber falls as Managed Investment Schemes come unstuck We feel for the thousands of investors who looked to reduce their tax and gain future income from agribusiness investment schemes. Our sympathies lie with all the investors who face uncertainty and losses as a result of the failure of Timbercorp and Great Southern. Schemes backed by 100page prospectuses and sold by accountants have proved to be flawed, even being referred to as Ponzi schemes. Great Southern raised $1.8 billion over the past five years, and managed 45 managed investment schemes on behalf of 43,000 investors. Average investments were over $40,000. However, what they will retrieve remains unclear, as once again the big banks are in pole position as secured creditors. In comparison to investing in trees, almonds and cattle, with all the uncertainty that accompanies agriculture, including fire, drought and other calamities, investing in residential or commercial property would have produced dramatically different results for these investors. Tax benefits are available for investment property, as is future capital growth, with rental income supporting the mortgage holding costs to ensure affordability. It remains a mystery to us why accountants would be steering their clients into risky schemes like MIS projects when the logic and safety of investment property is accessible and available as an alternative. Perhaps the attractive selling commissions to the accountants had something to do with it. A clear conflict of interest, in our view, and a real warning to all of us once again to beware of the motives of the financial planners (and accountants) who steer client investments based on their advice. Caveat emptor. “Let the buyer beware!’
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
Super tax changes likely to increase demand for investment property The reduction in concessional changes to superannuation announced in the budget will serve to increase the attractiveness of investment property. In a move that has attracted a fair amount of criticism, the concessional contribution (CC) caps will be halved from $100,000 to $50,000 effective 1 July 2009, and this upper limit will reduce further to $25,000 effective 1 July 2012. The value of the reduction in concessional super contributions over 4 years is estimated by the Treasury at $2.8 billion*. In order that they do not pay more tax as a result, investors will be looking for other taxeffective investments, such as investment property. Investment property is likely to be the target of this money looking for a tax effective home, with an increased use of negative gearing. The share market could also be considered, but it is unlikely that the memories of margin calls that have so savaged many investors and companies will be easily forgotten. Managed Investment Schemes are also likely to fall off the radar after the collapse of Timbercorp and Great Southern. So with a significant shift of these funds towards investment property, we see a further driver to the growth and upswing that is anticipated in the property market. What this means is rising property prices. If you are thinking about further investment properties, you need to consider the opportunity to get in early and take advantage of any increase in property values caused by a return of investors seeking a tax effective strategy for retirement savings. *Source: The Australian Financial review, Thursday 28 May 2009
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THE HORIZON NEWSLETTER I ISSUE 6 I MAY 2009
A Message from stephen We are moving through exciting times that we will look back on as a once-in-a-lifetime investment opportunity. Housing prices have come off their peaks, interest rates are at 49-year lows, oil prices have dropped considerably, and the government has pulled all the levers to inject funds into our pockets and investment into the economy. There is direct stimulation into the property market through the First Home Owner’s Grant and the Rental Affordability Scheme, and measures have been put in place to secure the commercial property market. The opportunity to fund an affordable investment property is here right now, with the only possible hesitation being the fear of possible unemployment in the year ahead. (This risk can be averted through an Income Protection insurance policy). From a rental point of view, every passing month serves to increase demand, as new arrivals reach our shores, the local population increases, social changes (eg single person households) continue, and as construction declines despite the huge backlogs in accommodation. In terms of the future need for income, the recent budget has spotlighted the enormous challenge posed by the numbers of ‘baby boomers’ steaming towards retirement, who are underprovided for in terms of super and other assets, and who the government will struggle to support given the massive cost of even a modest increase in the age pension (the $32 / $10 pw increases will cost $14 billion). The solution is so obvious – investment property – but only 1 in 10 Australians heeds the call. Our mission at McCarthy Group is to spread the word beyond our existing clients. The need is great, the opportunity is available, it’s absolutely affordable, and it’s proven beyond any doubt. If you have friends or relatives who you feel could benefit from a call, please let us know. These are times that are not to be missed, and it has never been more important to take active steps to secure the future. Please call us on (02) 9687 3601 or email info@mccarthygroup.com.au Good luck and Happy Investing. Stephen McCarthy
Win an Apple iPod Nano here’s how. We’d love to hear your views on the investment property market or any other subject that you feel would be of interest and relevance to Horizon readers. Simply email your contribution to info@mccarthygroup.com.au and we’ll send a colourful 16GB iPod Nano valued at $275 to the sender of the best entry. We’ll also publish the story in the next edition of Horizon. If you have friends or relatives who you feel would benefit from an obligation-free review of their future financial circumstances, please feel free to forward them a copy of this e-newsletter, or email us at info@mccarthygroup.com.au or call (02) 9687 3601.
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